Company law

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  1. Order of payment of creditors
    • 1. Fixed Charges (has to be registered)
    • 2. Expenses of the winding-up
    • 3. Preferential debts (251 EA 2002) 
    • - pensions to pension schemes 
    • - payments to employees (4 months period before commencement of winding up, max. 400 p/p)
    • 4. Floating charge holder
    • 5. Ordinary debts
    • 6. Deffered and subordinated debts
    • 7. Members' repayment of capital and profits
    • - ordinary shares 
    • - preference shares (receive their share first)
  2. Procedures for companies in financial difficulties
    • (1) Administration order
    • (2) Voluntary arrangement
    • (3) Receivership
    • (4) Liquidation (winding-up)
  3. Compulsory winding-up: s122(1)(f) IA 1986
    The company is unable to pay its debts

    • - Non-compliance with a statutory demand
    • - Non-satisfaction of a judgment in favour of a creditor
    • -Not able to pay debts as they fall due or the value of assets is less than the amount of liabilities
  4. Re Lowerstoft Traffic Services Ltd (1986) per Hoffman J
    • The old position regarding winding-up when everybody could file a petition to wind-up the company (even if very small amount of debt is concerned) which overloaded courts. 
    • This case introduced the order for winding-up is discretionary therefore court will look at:
    • - number of creditors 
    • - value of the debt 
    • - how old are debts
    • - proportion of the debt and assets of the company
    • - are debts are proven or alleged
    • - motive
    • - general principles of commercial morality 
    • - whether are there opposing creditors
  5. Consequences of winding-up petition s 127 IA 1986
    any disposition of company's property, and any transfer of shares or alteration in the status of the company's members, made after the commencement of of the winding-up is, unless the court otherwise ordered, void
  6. Cott's & Co v Stock 
    Banks no more have to pay money back to the company in process in winding-up in case they made transfer without awareness that the company in the process wing-up
  7. Duties of the Liquidators (fiduciary)
    • - to act in a good faith 
    • - avoid conflicts of interest 
    • - not make a secret profit
  8. Re Silver Valley mines (per Cotton LJ)
    Liquidator is not a trustee. He is person appointed by the court to do a certain class of things; he he has some of the rights and some of the liabilities of the trustee, but is not in the business for renumeration, he is bound to bring reasonable skill to its performance.
  9. Transactions at an undervalue S 238(4) IA 1986
    • - either by way of gift 
    • - sell at an undervalue to raise some money
    • - within 2 years of the onset of insolvency
    • - can chelange the transaction provided that company was insolvent at the day of transaction or become insolvent as a result of it
    •  If the transaction with connected person - insolvency is presumed  

    • Defense:
    • - acting in good faith
    • - reasonable grounds for believing that transaction will keep company afloat
  10. Connected person s 252 CA 2006
    • (a)members of the director's family
    • (b)a body corporate with which the director is connected
    • (c)a person acting in his capacity as trustee of a trust
    • (d)a person acting in his capacity as partner
    • (e) a firm that is a legal person under the law by which it is governed and in which the director is a partner
  11. Defenses to presumption of insolvency s 238 (5) IA 286 
    • (a)that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and
    • (b)that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.
  12. Voidable preferences s 239 IA 1986
    (a)that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities, and

    (b)the company does anything or suffers anything to be done which (in either case) has the effect of putting that person into a position which, in the event of the company going into insolvent liquidation, will be better than the position he would have been in if that thing had not been done.

    • Test: whether it was desire to make preference
    • Desire is presumed if dealing with connected person
  13. Re MC Bacon Ltd (1990)
    • Desire is needed to place person in a better position. 
    • Test is SUBJECTIVE
    • Desire is presumed in case of dealing with a connected person
  14. Relevant time for voidable preference
    • 2 years - connected person 
    • 6 months - non-connected person
  15. Avoidance of floating charges unconnected persons 245 IA 1986
    • - unconnected person 12 months 
    • - was there fresh consideration? (if yes, then liquidator cannot charge)
    • - was company insolvent at that time or in result of it? 
    • ! Bank cannot secure past consideration
  16. Avoidance of floating charges connected persons 245 IA 1986
    • - 2 years prior winding-up petition
    • - was there a fresh consideration?
    • - insolvency at that time or in the result is irrelevant
  17. Personal liability of directors
    - Prohibiting management (s 216 and s 217 IA 1986) 

    - Fraudulent trading

    - Wrongful trading 
  18. Fraudulent trading
    • if, within the 12 months immediately preceding the commencement of the winding up, he has—(a)concealed any part of the company’s property to the value of £500 or more, or concealed any debt due to or from the company, or(b)fraudulently removed any part of the company’s property to the value of £500 or more, or
    • (c)concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the company’s property or affairs, or
    • (d)made any false entry in any book or paper affecting or relating to the company’s property or affairs, or
    • (e)fraudulently parted with, altered or made any omission in any document affecting or relating to the company’s property or affairs, or
    • (f)pawned, pledged or disposed of any property of the company which has been obtained on credit and has not been paid for (unless the pawning, pledging or disposal was in the ordinary way of the company’s business).
  19. Patrick v Lyon Ltd
    actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame
  20. Wrongful trading s 214 (4) IA 1986
    • - Directors have actual and constructive knowledge and they knew or should have  known that the company close to insovency
    • - taken every step to minimize loss of creditors 

    • the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by reasonable diligent person having both - 
    • (a) [ OBJECTIVE] the general knowledge, the skill and experience that may reasonable of a person carrying out the same functions as are carried by that director in relation of the company or
    • (b) [ SUBJECTIVE] the general knowledge, skill and experience which that director has (financial director will be expected to greater knowledge)
  21. Remedy against director
    Compensatory. D has to compensate the loss which his actions leaded to (not penal and not to punish)
  22. Ring Fencing
    • put aside from floating charges to unsecure creditors: 
    • 50% of first 10,000 
    • 20 % of any remainder
    • total cap 600,000 pounds
Card Set
Company law
Liquidation of the UK companies
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